When I lived in Bishkek 25 years ago, then-president Askar Akayev was so effusive in expressing his desire for Kyrgyzstan to become the Switzerland of Central Asia that the Swiss ambassador once joked that Akayev liked his homeland better than he did. 

It was a pretty understandable hope - who wouldn’t want their poor ex-Soviet republic to become as prosperous and stable as Switzerland? – but it was a forlorn one. Both countries are multilingual and mountainous, but have little else in common. In the end, Akayev fled to Russia, his fall precipitated by the Tulip Revolution. He was the first of three presidents to be chased out of office, only for each new government to be every bit as corrupt and incompetent as those that were overthrown. 

But will it be sanctions-dodging that finally brings Kyrgyzstan and Switzerland together? There is already substantial transhipment of physical goods via Kyrgyz companies to help Russians access goods they’re supposedly barred from purchasing, including luxury cars, but the business appears to be becoming more elaborate.

A GOLDEN OPPORTUNITY

Back in April, the former Binance CEO Changpeng “CZ” Zhao (he stepped down after being jailed in the US, but still owns most of the company) announced that he was advising Kyrgyzstan on crypto reforms. “Such initiatives are crucial for the sustainable growth of the economy and the security of virtual assets, ultimately generating new opportunities for businesses and society as a whole,” said current president Sadyr Zhaparov at the time.

In May, we heard that Kyrgyzstan plans to launch a dollar-pegged stablecoin called USDKG which, fascinatingly, will be backed not – as it is at Tether (USDT) or Circle – with dollar assets, but with $500 million worth of gold from the Kyrgyz government.

“Anyone holding USDKG can redeem it for physical gold in Kyrgyzstan, exchange it for crypto like USDT, or withdraw it as fiat through the traditional banking system,” said William Campbell, who is advising the government in Bishkek on the venture. 

Apparently, the aim is for the cryptocurrency to be used for remittances back to Kyrgyzstan from citizens abroad, as well as legal tender inside the country, but it also looks like an open invitation to money laundering and sanctions dodging. If USDKG works the way he says it will, it will be a state-approved backdoor linking the gold market, the traditional financial system, and the crypto world. It would be in short a 21st-century version of what Switzerland used to be for Nazis, dictators, mafiosi, spies and tax-dodgers, before the rest of the world forced it to go straight (ish).

Last week, the FT published a fascinating investigation into how a fugitive Moldovan oligarch and a Russian bank have created a rouble-backed stablecoin called A7A5, which they are trading in Kyrgyzstan, effectively to gain access to USDT, which they lost when the Garantex exchange was shut under U.S. pressure in March.

“(It is a) friendly jurisdiction that is not so subject to sanctions”, said A7A5’s director Leonid Shumakov. “It is no secret that this jurisdiction is currently helping a lot to cope with the pressure [Russia] is under.”

Earlier this year, the United States sanctioned a Kyrgyz bank that it suspected was trying “to create a sanctions evasion hub for Russia to pay for imports and receive payment for exports”. But it’s not clear what it can do about a stablecoin if it has no connection to the U.S. financial system and therefore no reason to fear the Department of the Treasury.

History shows that when a sufficiently large number of rich people or companies become discontented by government restrictions on what they can do with their money, they will find a jurisdiction willing to earn fees by helping them evade those obstacles. This is how places as varied as Hong Kong, Dubai, the Cayman Islands and Delaware earn a living, and it would not be a surprise if Kyrgyzstan were to join them.

SHEDDING LIGHT ON THE DARK ECONOMY

Britain of course is the granddaddy of all the tax havens, so it’s heartening to see evidence that reforms to try to clean up its rotten financial system are starting to have some effect. In 2023, parliament passed a law to prevent British companies from being quite so perfect a vehicle for the committing of financial crimes, and the corporate registry has issued a progress report.

Highlights include the fact that tens of thousands of fraudulent companies have been struck off the register, many other companies have been forced to update their information to make it accurate, and attempts to create companies with false information have been prevented. Applicants are going to have to verify their identity before they file information, but will also have the right to prevent that information becoming public if it would pose a risk to themselves.

It wasn’t long ago that Companies House was the preferred source for cheap, reliable shell companies used in money laundering scandals globally. And it is genuinely brilliant that efforts are being made to prevent that from happening again (although there is still a long way to go).

It’s interesting as well that UK law enforcement agencies are trying to build ties with foreign counterparts in order to tackle corruption and financial crime, not least since they appear to be trying to encourage American agencies not to retreat from the fight. It will of course take more than a few nice words from the Brits to enthuse Donald Trump’s White House about the merits of fighting corruption, particularly considering the number of attorneys tackling investigations under the Foreign Corrupt Practices Act appears to have been halved.

While on the subject of international cooperation, here’s an interesting paper about the effect on a bank in the Isle of Man of the automatic exchange of information, which was brought in after the 2007-8 financial crisis to make it harder for people to dodge tax. Its analysis is based on leaked data and only covers one relatively small bank in one relatively small jurisdiction, but appears to reveal some pretty significant flaws in the regulations, which may make them less effective than we’d hoped.

And while on the subject of tax havens, the British Virgin Islands has issued proposals for how it might make its corporate registry less opaque, and they are not great. “Most alarmingly,” said Transparency International’s Margot Mollat, “the policy of notifying company owners when their information is accessed puts journalists and civil society actors at serious risk of retaliation and legal intimidation.” This isn’t transparency, Mollat added, “it’s a system that will frustrate scrutiny and protect dirty money”. 

A version of this story was published in this week’s Oligarchy newsletter. Sign up here.

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Years of sanctions have substantially weakened the Iranian economy, as evidenced by Iran’s keenness to have them cancelled, with sanctions removal a key sticking point in negotiations with the U.S. before Israel began bombing Iranian nuclear sites on June 13. But anyone who thinks sanctions are an all-powerful tool should spend some time speaking to Tehran businessmen. The exchange houses in the bazaar in Tehran can arrange money transfers to and from anywhere you like, no matter what the Office of Foreign Assets Control says.

It’s all coordinated via encrypted messaging apps and, as long as you’re transacting with a major centre like London, Paris or New York, your cash will be ready for collection within a couple of hours. “You can get paid electronically if you have a bank account. You need to be a bit careful about having lots of random payments coming into your account, but otherwise it’s straightforward,” one Iranian told me.

The trick is the same one used at various times and on various continents in Chinese Underground Banking, hawala transfers, or the Black Market Peso Exchange, all of which also exist to provide financial services outside the Western-dominated financial system. Instead of moving money electronically through bank accounts, they transfer value through the trade network, something that Western policy makers really struggle to get a grip of, not least because they often don’t understand what’s going on.

A DIGITAL ACT OF WAR

Cryptocurrencies have really supercharged these networks because, instead of moving value in a shipload of used cars or a container of designer handbags, which take weeks to reach their final destination and are cumbersome to buy, move and sell, they can be shifted quickly, easily and with minimal time delay. Hawaladars can now shift value between countries with their phones, and the sarafis in Tehran are all using Tether, despite the fact they’re not supposed to (I mean, neither are Venezuelans, but that hasn’t stopped the national oil company).

This is why last week’s hack by the Israel-linked group Predatory Sparrow (who are presumably unrelated to calypso king Mighty Sparrow, but I’ll take any excuse to link to this banger) is so interesting. By raiding $90 million from Tehran’s Nobitex crypto exchange it was striking a blow against the informal financial ties between Iranians and the rest of the world. The lost cryptocurrencies included, according to Chainalysis, “Bitcoin, Ethereum, Dogecoin, Ripple, Solana, Tron, and Ton” although the hackers didn’t actually steal them but instead sent them to addresses from which they could not be retrieved, which is a bit like raiding a bank and burning all the currency in its vaults. Elliptic, however, noted that dollar-backed stablecoins may be among the stolen crypto.

Stablecoins are different to other cryptocurrencies in that their value rests on something other than the forces of supply and demand – in Tether’s case, that is the dollar – and the companies that issue them own large stocks of real-world assets to protect the price peg. The strange consequence of this is that while America’s allies use stablecoins to escape the dollar financial system, they are in effect supporting that system by maintaining demand for U.S. Treasuries.

ALL THAT GLITTERS IS CRYPTO

They are not entirely happy about this, which is why they have been investing so heavily in the other great reserve asset: gold, the price of which has hit high after high after high this year. And this raises the fascinating prospect of a gold-backed stablecoin taking off, giving all the advantages of Tether but without having to support the U.S. government.

“The rise of gold-backed currencies that circumvent the US banking system, coupled with sanctioned regimes’ growing interest in the adoption of alternative currencies and payment systems, could create a massive blind spot for US financial intelligence and sanctions enforcement efforts,” argues the Atlantic Council in an acute analysis. It suggests that Western countries should stop spraying sanctions around like they’re antibiotics on a pig farm, or such a future will come to pass sooner than anyone would think possible.

It's a warning that seems to be falling on deaf ears in Washington, where congresspeople are busy debating ever-higher sanctions, and where businesspeople are busy riding the crypto wave. The latest deal is the appearance of Tron on Nasdaq via a reverse merger, which is good news for the company’s Chinese-born founder Justin Sun. As you may remember, a probe by US regulators into Sun’s activities was paused after he made a $75 million investment into the Trump family’s crypto firm World Liberty Financial last year.

This was not the only Trump dividend from the family partnership with Tron, a blockchain blamed for 58 percent of all illicit activity in the crypto world, since two of the president’s sons in February joined the advisory board of the bank that organised the reverse merger. On top of that, Tron has started minting the Trump family’s own stablecoin USD1, which will help increase the first family’s already large crypto dividend.

In case you’re concerned that the business ties between Sun and the Trump family might lead to a conflict between the president’s personal and public interests, however, there is no need to be. “President Trump is dedicated to making America the crypto capital of the world,” White House spokesperson Anna Kelly has said. “His assets are in a trust managed by his children, and there are no conflicts of interest.”  I don’t remember everyone being quite so accepting that Hunter Biden’s business interests were separate to those of his father, but of course that was a very long time ago.

A version of this story was published in this week’s Oligarchy newsletter. Sign up here.

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